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 Economic growth figures on Monday added to evidence that concern
about job security is holding back consumers, trumping the urge to
spend before a rise in the national sales tax rate in April makes
goods more expensive.
Although Japan's jobless rate is at a six-year low, the number of
contract workers, who are paid less than regular staff, is at a
record high.
That equation is undermining the government's base scenario that
consumer spending will boom in the months before the tax hike, fall
sharply immediately afterwards and then resume steady growth
underpinned by falling unemployment and rising wages.
Such a scenario is key to the broader goal of dragging the sluggish
economy out of almost two decades of stagnation marked by grinding
deflation and on to a path of sustainable growth.
"We're facing the uncomfortable possibility that consumer spending
won't get any better before the tax hike," said Norio Miyagawa,
senior economist at Mizuho Securities Research & Consulting Co.
"The jobs market is improving, but the problem is non-regular
workers. This could be behind disappointing spending."
The government, which has played an unusually prominent role in
lobbying companies to raise wages, could come under pressure to use
more structural economic reforms to broaden growth and reverse labor
market reforms that could increase contract workers.
The Bank of Japan could face calls to ease policy but can likely
fend off the pressure, arguing that its economic forecasts already
take into account swings in consumer spending. It unleashed a
program last year of massive cash injections into the economy that
is now bigger than that of the U.S. Federal Reserve.
GDP figures on Monday showed that Japan's private consumption grew a
weaker-than-expected 0.5 percent in the fourth quarter of last year.
This confounded expectations for 0.7 percent growth.
Overall economic growth in the October-December period was much
lower than expected at 0.3 percent.
Purchases of cars were the main reason for the increase in
consumption, but Japanese spent less on clothes and food, which
pessimists say is a sign of weakening confidence because it suggests
lower income earners are holding back.
In December, consumer sentiment hit the lowest level in just over a
year due to a spreading fear that wages will stop improving, Cabinet
Office data showed.
A six-year-low jobless rate of 3.7 percent should, in theory, give
consumers confidence to spend. But new jobs are going to contract
workers, who earn on average only a third of what regular employees
get paid.
In December, contract workers made up a record 37.5 percent of the
workforce, up from 35.3 percent at the start of the year. During
that time, the ratio of regular workers fell to 62.5 percent from
64.7 percent.
When Japan last raised the sales tax in 1997, contract workers
accounted for around 23 percent of the workforce.
Compounding the problem, Abe is pushing legislation that would make
it easier for companies to replace regular employees with contract
workers.
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The aim of the legislation is to make the labor force more mobile
and flexible, but this could backfire by hurting consumption, just
as it did when the ruling Liberal Democratic Party first expanded
the number of contract workers in the early 2000s.
Abe's government will raise the national sales tax of 5 percent — the lowest equivalent consumption tax alongside Canada in the OECD — to 8 percent in April to pay for healthcare costs in one of the
world's fastest ageing societies.
Some optimists argue there is still ample time for spending to
pick up in the current quarter and that strong car sales in the
fourth quarter showed people were willing to spend big.
However, others argue lackluster spending overall is a symptom of
declining confidence that Abe can succeed in encouraging companies
to raise wages substantially.
That means consumption could stay weak later this year and make it
politically difficult for Abe to secure a second planned stage in
raising the sales tax to 10 percent in 2015 — part of a broad effort
to rein in the country's massive public debt that is more than
double the size of the economy.
Under direct pressure from Abe, a few big-name companies such as
Toyota Motor Corp <7203.T> and convenience store chain Lawson Inc
<2651.T> have suggested they may raise base pay.
But there are doubts that smaller firms in Japan, which employ most
workers, can follow suit. While Toyota expects to post a record
operating profit this financial year, those further down the supply
chain are feeling cost pressures. Pay rises are the last thing on
their minds.
"The gains in wages so far are not spreading to consumption, meaning
spending may not be strong enough to drive growth in the second half
of the year," said Shuji Tonouchi, senior fixed income strategist at
Mitsubishi UFJ Morgan Stanley Securities.
"There will be public works spending, but the scale and the impact
could be less than in previous years."
The government has already passed a 5.5 trillion yen stimulus
package that relies on public works to prop up demand after the tax
hike.
However, the government is already having trouble spending public
works money due to a shortage of construction workers. If this
delays the stimulus package, aggregate demand could suffer.
(Additional reporting by Tetsushi
Kajimoto: editing by Tomasz Janowski and Neil Fullick)
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